The New Economy In Historic Perspective

March 19, 2001

U.S. productivity growth has markedly accelerated since 1995, largely due to recent innovations in Internet technology, computers and telecommunications. How do these innovations and the explosion of economic growth associated with them compare to the "golden age" of innovation that occurred in the late 19th and early 20th century with the advent of electricity, the internal combustion engine, the telephone, phonograph, motion pictures and air transport?

According to Robert Gordon, a researcher for the National Bureau of Economic Research, these productivity gains don't measure up to the gains of the early 20th century for the following reasons:

The gains of recent years are largely confined to the durable manufacturing sector (including the production of computers) which involves only 12 percent of the economy

The "great inventions" -- electricity, the combustion engine, and chemical and pharmaceutical advances -- not only led to dramatic upsurges in productivity, but also changed everyday life by improving working conditions, sanitation and food safety, and even brought about the economic development of the southern United States (due to air conditioning).

Much of the activity involving the Internet is simply a substitution of one form of communication for another.

Another reason for the leap in productivity during the early 20th century was the closing of the American labor markets to immigration and the goods markets to trade, which gave a boost to real wages and promoted productivity growth between the 1920s and 1960s. The post 1972 slowdown in productivity could also be attributed to a reopening of labor markets to immigration and foreign trade.

Source: Chris Farrell, "The New Economy in Historic Perspective," NBER Digest, December 2000; based on Robert Gordon, "Does the New Economy Measure Up to the Great Inventions of the Past", NBER Working Paper No. 7833, August 2000, National Bureau of Economic Research, 1050 Massachusetts Avenue, Cambridge, Mass. 02138.